游戏主机（第二部）：Sony——[Business Breakdowns，第202期]

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This is Business Breakdowns. Business Breakdowns is a series of conversations with investors and operators diving deep into a single business. For each business, we explore its history, its business model, its competitive advantages, and what makes it tick. We believe every business has lessons and secrets that investors and operators can learn from, and we are here to bring them to you. To find more episodes of Breakdowns, check out joincolossus.com. All opinions expressed by hosts and podcast guests are solely their own opinions. Hosts, podcast guests, their employers, or affiliates may maintain positions in the securities discussed in this podcast. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.

This is Matt Russell, and this is the second episode of our multipart series on the video game console market. If you’ve yet to listen to episode one, Sia Kamalie, a founder and fund manager at Skycatcher, joined me to break down that video game console market and his thesis for why it’s an inflecting opportunity. In this episode, we go micro, and Sia is back to break down Sony. Now, given this episode is part of the series, I’d say it’s not your traditional breakdown. We spend the majority of our time talking about Sony’s opportunity in the gaming market and the growing anime market, so Sia and I spend a lot of time talking about the catalysts there and some of the dynamics that are happening under the hood of this massive conglomerate. Now please enjoy this episode on Sony.

All right, Sia, we’re going to get into the meat and bones of Sony here. It’s a tech conglomerate, and we’re going to take the video game angle through a lot of this conversation, but Sony is so much more than that and has this major history to it. Let’s start with a framing of Sony—a sketch of the business in the best way that you would describe it today.

Absolutely. I think the one-liner here is that Sony is this awakening global giant in video games and anime. Let me tell you a little bit about why. It’s a company with a $120 billion enterprise value that generates about $80 billion of revenue and $9 billion in earnings across 6 business segments.

The most important one, and the key to our thesis, is this division called Sony Entertainment, which makes up 3 of the 6 divisions and represents about 60% of revenue and earnings. A lot of people recognize Sony for its leadership in hardware and legacy media, and they’re all really great, but when you think about the future of Sony, what we think is really underappreciated and undervalued by the market is that it has 2 generational consumer platforms in PlayStation and Crunchyroll. Both of these platforms capture secular growth in key categories of video games and anime.

PlayStation is typically seen as a hardware business, which is very cyclical, but PlayStation Plus we view as a critical distribution channel for games. It functions as the App Store, the content library, and the storage, and we think it’s about to hit this magic window where the lifetime value of customers will grow 3 times over the next 5 years.

The other part of Sony that has become really clear in the last 12 months is that they’re going to tap into the global growth of anime. In fact, they already own the largest streaming platform in anime, Crunchyroll, which you can think of as the Netflix for anime. It has reached over 115 million users and is entering this next stage of monetization.

Looking at Sony, this big conglomerate, we think PlayStation and Crunchyroll generate very high-margin software earnings of about $2 billion today, but we think that will grow 5 times over the next 5 years. That will really drive this inflection for Sony, where you think of it as an industry-leading, digital-software-driven engagement and entertainment platform.

The history here is so interesting. As you mentioned, whether it’s the hardware of the PlayStation or going back in time to the Walkman, I’ve always associated Sony with various pieces of electronic hardware. Can you bring us up to date? It sounds like we’re seeing this shift toward a more digital, software-oriented model. How did that take place, and are there any interesting anecdotes over the years that turned Sony into what it is today?

Absolutely. I think it’s important to start looking at Sony from 2021. That’s when it reorganized itself as a global consumer-entertainment company, and it’s also when it started its fourth midterm plan. They called that plan “Evolving Sony.” That plan ended last year, and we’re now entering this next phase, which Sony calls its “Beyond the Boundaries” plan.

This fifth midterm plan, which begins this year, is all about Sony evolving its leadership into what they call creative entertainment and being able to connect the multilayers of physical and virtual realities.

You sketched out the segments well for us. Could you put some numbers around those various segments? I know they have music and Sony Pictures. What are some of the high-level numbers to frame those pieces of the business?

Look at the consumer-entertainment business, which is 60% of the business, as one big group. This is the core and what we think is the most valuable part of Sony.

Under PlayStation, you have a business that’s almost $30 billion in revenue today and generates about $2 billion in operating profit. We think this grows to $8 billion-plus, with margins going from 7% to 19%. It’s the number-one console ecosystem today, with over 116 million monthly active users, and 70% of them purchase games through the console itself.

Then we look at music. Their music business is number one in publishing. In fact, you could look at this and say it’s an iconic asset because it captures over 5 million songs. It’s a solid business where margins have been steady at 20%-plus, and it’s roughly a $1 billion business. We’re going to be conservative and assume that grows at 8% because it’s built on the back of streaming and royalties.

Then we look at Pictures. Pictures is about a $10 billion revenue business, but its operating profit is about $800 million, so it’s very low margin. Within Pictures, you have the historic business of box-office movies, such as Spider-Man, Jumanji, and Ghostbusters. Then you have this really growing asset called Crunchyroll, which is the third-largest streaming platform in the world today. We think this is going to grow revenue at 40%-plus and ultimately overtake Pictures. Maybe they even break it out as its own category.

When we get to the historical part of Sony, this is where we pretty much value it very conservatively. We’re not trying to take a strong view on the hardware business. This is when you’re looking at TVs and just the traditional stuff that people know Sony for.

Its image-sensor business is about a $10 million business, with high-single-digit margins. They’re the dominant leader in this category, with about 53% of the world’s camera-sensor market. Then there’s a category they call Entertainment Technology and Services. This is a $6 billion business, but it has all the other different hardware devices in that bucket.

Last but not least is financial services, where a bright spot for our thesis is that this is something they will spin off next year. It shows a commitment from the management team to become a leaner, more focused consumer play.

It’s always interesting when you hear conglomerates start to make some type of focus on different categories, and it seems like that’s happening here. As you run through all of those different categories, there are still a lot of moving parts.

I want to get into Sony Pictures and the Crunchyroll theme a little bit. I have to mention that the book “The Big Picture,” on the Sony Pictures hack, was one of the more interesting things that I’ve read in recent years. It’s been so interesting to see how they’ve dealt with all of the shifts in movies, theaters, and streaming and adjusted their business accordingly.

There’s not much talk about Crunchyroll in there. It’s a name I’m familiar with, but I don’t have too much detail on it. You mentioned that it’s a massive anime audience. Can you go into more detail about what that looks like from a financial perspective and what the actual business and business model are?

Going back to 2021, Sony consolidated the anime streaming platforms. They bought a few players and rolled them up into this business called Crunchyroll. With that, they basically own the market in licensed streaming of anime content.

Let me take this a step further back. Anime is one of those categories that’s been in secular growth, but what’s interesting is the tipping point: The industry has grown outside of Japan for the first time, beyond the domestic Japanese market. It’s about a $3 billion industry in domestic Japan, and most of it is merchandise.

One of the things that I think is interesting is that you saw post-COVID behaviors around media and content become more nuanced, and anime saw huge growth as a result. When you think about this category, we estimate there are almost 670 million fans, on their way to 1 billion-plus. They’re people you wouldn’t necessarily expect, but it’s also exciting to see this be countercultural while at the same time becoming pretty mainstream. It’s more than just cartoons; it’s adult cartoons in that sense.

Now let’s get to the numbers for Crunchyroll. Crunchyroll is the third-largest streaming platform. It has about 150 million users, of which about 15 million are monthly paying subscribers. The rest are being monetized through ads.

The thesis here is that, over time, you’re going to see users convert from the advertising model to the paid model. With that, you see this Netflix story happening all over again. Imagine that, buried in this conglomerate called Sony, you have a business that’s almost half the size of Netflix in terms of user base, but monetization-wise, it’s early days. This is Netflix in 2011. We have a long way to go to get these paying subscribers up.

One of the key things that we’re really tracking here is the growth of the paying subscribers. If you think about the Netflix comparison, Netflix’s average revenue per user is about $140 per monthly active user. For Crunchyroll, it’s $9, so there’s a long way for that to grow.

We also know that, by tracking the behavior of Netflix, you can see anime content on Netflix has picked up massively in the last few years. You may say, “This is competitive to Crunchyroll,” but not necessarily. One of the key things about Crunchyroll and anime is that most of the content being watched is licensed content. It comes from manga and from Japan itself. You can’t just go in and replicate so many of these relationships and exclusive licensed-content arrangements.

Netflix has tried to enter this category by doing its own originals, but it’s nowhere near the success of major anime IPs like Naruto or Dragon Ball Z.

It’s very interesting because I think Sony was the poster child for not going down the path that Disney, Paramount, and so many others went down when they chased a streaming app themselves to compete with Netflix. They were happy to license things, yet they do have this business inside the company that is doing just that. There’s some thoughtfulness around it.

When you think about all of the business lines together, how much synergy do you think exists from operating these businesses? Do you think there’s a lot of cross-functionality? If there’s a great IP title within the PlayStation universe, is that something that’s very likely to get bled into something that could happen at Sony Entertainment? Is that part of the thesis at all, or is there anything around the culture and that collaboration?

I think one thing that’s more unique to Japanese gaming companies is that they’ve all been building transmedia IP. What I mean by that is building IP across multiple channels, whether it’s games, books, movies, or merchandise. That’s something you don’t really see done anywhere else as well.

For Sony, they’re in a unique position. Going back to this $30 billion anime market, most of it is merchandise, and the video-game part of it has not actually been tapped into as much as we think. If you look at the overlap between people who love anime and people who play video games, it’s actually very high. You wonder why more monetization isn’t happening on the games front, because that’s a really great place to monetize.

There is this company called Bandai Namco that’s doing this. They have a strong hold on top anime IP in games, and I think Sony is in a great place to start going down this path of building out anime content for games. They can leverage their global presence through PlayStation and the fact that they have the platform everyone is watching on.

Remember, part of the power of having a streaming platform is that you see what people watch, and you can then tailor your future content to that. If we went down the rabbit hole and you had more hours to share, the rabbit hole of subgenres within anime is absolutely fascinating. You’d be blown away by how much creative content there is, because there are things you can do with that medium that you can’t do with traditional media.

In many ways, it opens up the world of philosophy, life, and the challenges that we as humans face through storytelling. Sony is definitely thinking about this. They’ve talked about it, and I think we’re also quite excited to see how they connect these dots.

Are there unique or innovative ways that they’re going about this collaboration or synergy across the platforms?

They are, Matt. One of the most interesting moves Sony made this past August was announcing the launch of a Layer-2 blockchain called Soneium.

If I take a step back even further, about 2 years ago Sony filed patents around the use of NFTs to move digital assets across different ecosystems. When you think about the blockchain application of IP and the idea of owning a digital asset, Sony is, I would almost say, the best-positioned company in the world to execute. They’ve already started. They’ve already made a couple of moves, and I’m really excited to see how this evolves.

The other thing that you have to appreciate is that Sony’s move here will be very consumer-led. This is not going to be an iteration of what you’ve seen before when you think of NFTs. The idea is that, on a public blockchain, you own these assets, because the concept of owning a digital asset is quite novel.

I really think this is one of the game-changing aspects of enabling the video-game industry to expand its total addressable market in a way that we cannot fathom today. Just imagine the scenario where, 20 years from now, your portfolio of assets includes your home and your car, but also my sword in “World of Warcraft” that’s worth $100,000. It’s not too crazy.

I think big total addressable-market expansions are usually when you have big outcomes. We’re watching very closely what Sony is doing here, because they have IP across music, film, anime, and video games. When you put the pieces together, I think you’re looking at a $130 billion company in terms of enterprise value.

What does it look like from a consolidated margin standpoint? What are the high-level metrics that are important to frame what the business looks like today overall?

We think margins double from here, which sounds aggressive, but they’re around 9% to 10% today. Sony has $80 billion of revenue, and we think that if they can double margins over the next 4 or 5 years, one, you’ll surprise everyone, but two, it will be on the back of PlayStation and Crunchyroll really hitting this next stride of software-driven businesses and software margins.

If you look at Sony at that next stage, today Sony’s earnings are around $11 billion, and you think earnings are going to double from here and get to $20 billion-plus. That’s easily a double in terms of a return from here.

Let’s go back to the argument I was making earlier: I think the multiple should be much higher. Why is this trading at single-digit multiples? Shouldn’t this trade at a much higher multiple? If that’s the case, you have this multiple-expansion component.

One thing that we always think about in our investment process is that we want the double kicker, or what I call the magic window: earnings growth and multiple expansion. In that case, we see Sony as this $400 billion company—a triple from here—but it’s because it’s being recognized for its leadership in these categories. It’s really a one-of-one in both of them.

The question is, why aren’t the margins reflecting that? We’re now entering this next stage where I think you’ll see that, and it follows the same playbook that management has laid out for everyone. They’ve been very good about communicating, more so now than in previous iterations.

If I were to dive into those numbers a little bit more, the doubling of Sony’s overall margins is going to be driven by a higher-margin business in PlayStation, and I’m sure Crunchyroll is part of that as well. The increase in the PlayStation margins themselves is also going to be important, because you need massive incremental margins to get to a true doubling of the overall margins.

Remember, PlayStation ecosystem margins have been compressed. They’re around 11% today, but they should get much higher. That’s partly because, over the last 4 years, this ecosystem has been weighed down by the hardware sales of PS5s, which haven’t done as well as they expected.

That changes, I think, next year, when you have a console-selling title. You’re also entering this next stage of leaning into live-service games, which feeds more people into the subscription. PlayStation margins can get to 20%-plus.

That's how we're looking at it to make it work. Then you look at Crunchyroll and say, "Look, Crunchyroll is this early-stage business where we think revenues today are around $1.1 billion, and I think the top line is going to grow at a 40% CAGR for 5 years." You're looking at a business that's close to $9 billion in revenue, and with, let's say, Netflix-like margins, that's going to really get us there. Where we're probably being the most aggressive—or, let's say, non-consensus—is looking at Crunchyroll through this lens of the Netflix playbook.

To date, I think because it's not broken out separately in its nice, clean way, you have to do a bit of back-of-the-envelope math to figure it out. But we're not there yet. If that's representing that big of a part of the business, then it will make sense, and then people will say, "Oh, this is the tech giant who was able to go into streaming platforms in a way that was very niche—looks niche—but then super successfully, because it's an area where it's necessarily hard for Netflix to compete with directly."

In terms of the Crunchyroll thesis, just in terms of that evolving and playing out over time, how much do you hear the company talk about it, if at all? And just the timeline for something like that: as you mentioned, substantial growth, but still at $1 billion, even with 40% revenue growth, showing up in an $80 billion revenue business, it's going to take some time before it feels like that really moves the needle. What do you think the timeline looks like for that to really become a meaningful piece of the business, and are you hearing it from the management team that that could be a possibility or a focus for them? I've never known any management teams to give very loose guidance like that, certainly not that. I guess how much does Crunchyroll just come up in the conversation?

They've definitely communicated, "We're going to focus on anime." I think the question just becomes: How big of an opportunity is it, and what does it mean for the overall business?

Too soon, yep.

That's something we're willing to step out and be a little bold on and say, "Based on what I know today, let's be a little visionary." If you ever think about these big, outsized returns, they never come from thinking in a linear way. You have to think directionally: Am I right? More importantly, is there accelerating growth here? We think all those pieces are here, and it's a story that's not getting a lot of talk about. But next year will be an important year for it because a bunch of events are happening in terms of anime next year.

Yep, that makes total sense. Given the size and where it is today, it's hard for management to spend a lot of time on that when they have the rest of the business. What would you say are their key areas of focus when you hear them? Does it tend to align with the way that you see things, especially in terms of the video game business and the console business? How much of the focus seems to be pointed in that direction, both from the management team and from investors, versus other initiatives within the business?

Sometimes these can be challenging because conglomerates can have problem children or different focus areas when there are crown jewels sitting inside. What does that look like for Sony?

If I didn't feel like they were focused on the right things, we wouldn't be having this conversation. I do feel like the management team really gets it, but you're also moving this big tank, this 800-pound gorilla. So what happens in the hardware segment? What happens in the chip segment?

When you look at Sony, for us it was basically building 6 different businesses in 1 and then seeing, "Okay, which ones matter, and which ones does management want to go toward?" It's clearly entertainment. They have clearly focused on that. They have also spent a lot of their messaging on the idea of Creative Entertainment Vision, which is not fully grasped by us.

They are leaders in image sensors, and obviously they have investments and a partnership in Epic Games. They see this world where they've got this huge, unique position of capturing the physical world through cameras and, at the same time, creating content. Then, looking at their distribution channels, they own the gaming distribution channel through PlayStation, and now they already have this distribution channel through anime.

I think this next iteration is, "How do we connect these dots to Sony Music?" That's an incredible asset. It's really a time capsule of humanity's greatest songs, and a great business, too. What's interesting is that when they sign up new artists, a lot of these artists say, "Look, we want to do a concert and a video game." They've done it. They were the pioneer in terms of doing concerts in Fortnite.

I look at that and say, "What music publisher can provide that kind of access?" There are unique moats and unique relationships that Sony has. If you put it all together, you're like, "Wow, this is a real one-of-one." The management team sees it and gets it.

Thinking about the industry dynamics and the conglomerate dynamics, M&A is a key piece of this. It sounds like I'll put the spin-off in the M&A category, just as a rightsizing of the business. What does that look like in terms of their historical activity, whether it's being an acquirer or being someone who divests a lot of assets? Do you think they exist within this world of M&A going forward? They have so many interesting assets, but they could also be an acquirer of assets. A general view of Sony and M&A would be useful.

We were in this period of the fourth phase of the evolving Sony story. During this period, they've made a bunch of acquisitions. They bought a few game studios; probably the most notable one was Bungie, which made a game called Destiny.

When you look at the divestitures, which will happen next year in financial services, this is all part of Sony as a creative entertainment company and really focusing on IP. I think they get that, and everything they're doing indicates that.

Where things are getting interesting is that, as an industry, gaming IP before COVID was looked at and people said, "Oh, it's just games. It's not that big of a deal. It's almost like it's for kids; it's a toy." Fast-forward to today, and every media giant looks at gaming IP and says, "Wow, these are probably the best assets," because not only are you monetizing in this software, virtual world, but you've had things that come over to the world of media.

The Last of Us is a Sony IP and one of the best series ever. Many people didn't even know that it was built on a video game. But you're starting to see games cross over to general media and succeed really, really well.

I think that opens up the door for potential M&A. If you said, "Where does potential M&A go?" it will still be game studios, but it may involve thinking about new markets. I touched on places like India and emerging markets. Maybe the content they like is a little bit different. Do we need to buy things in a more nuanced way?

Between the giants—Microsoft, Netflix, Sony, and Disney—I think they all recognize what's happening. It's just a question of who's going to be more aggressive here. We've seen some very aggressive moves already. If you were a banker and wanted to be a video game banker, the last 5 years were the time to do it because you got the biggest deals.

Yes, there has been no shortage of activity or rumored activity, and usually where there's smoke, there's fire. In an example like The Last of Us, which was a very interesting development of something that started as a video game, obviously that's going to bring a lot of attention, along with marketing and different dynamics like that.

Does that show up in the numbers at all? Do you have any sense of how big of an impact something like that can have? Even if it doesn't move the needle for an $80 billion business, I can understand that, but it can still be meaningful nonetheless. Do you have any context for what that actually looked like?

I think, going back to your point, it's hard to know whether that moves the needle. But I do think of this in a slightly different way: the competition is for IP and creative people, which is ultimately what these companies have. The most valuable asset in any game studio is the creative talent.

They'll see that and say, "Okay, I really like how you did that. I want to come work with you, Sony, instead of working with XYZ competitor." I think there's an intangible benefit. If I take a step back, we do a bunch of work analyzing the number of employees, the number of people building games, and where the creatives are and where they're going. That's actually a key part of our analysis.

I think Sony treats creatives very well. I can mention The Last of Us, but there was Helldivers, which was a successful game, and there are a bunch of titles that Sony comes out with and lets these indie studios remain independent, but says, "Leverage our reach so that you can come out and make a big noise."

They're in a unique position, and I think they recognize that. If you look back at Japanese culture and gaming companies, they all respect creatives highly and let them do their thing. There are just some companies where, in terms of monetization, you can do better. Korean and Chinese game companies have figured out monetization; it's very aggressive. The Japanese game companies are not there yet, but it's changing.

Yes, there's a sliding scale in terms of the intensity of that monetization. On the expense side, and thinking more about it through the capital-expenditure line and the investment line, what's required for this type of business? When you look at Sony, how much does that swing over the years? As a shareholder, can you see those earnings coming back to you? How do they typically treat capital allocation from that standpoint?

In the last phase we were in, capex was rising. We're now entering this next phase, where management teams have communicated that capex will start coming down while revenues accelerate, because a lot of the investments they wanted to make have been made.

Sony has done selective buybacks, and this next phase could be one of those periods in that sense. I think that's what makes things interesting. If you didn't know anything and didn't care about the qualitative aspects or any of that, and you just looked at the hard numbers, that's where we expect some change in behavior.

You've left this investment phase, and now you're going into this real return-on-capital phase. This is something the management team has communicated, and we're excited to see how that plays out.

It's always interesting when there's a shift in priorities or the end of a chapter from an investment standpoint, because it creates an opportunity to shift capital allocation. When you look at a conglomerate like this, how do you approach the value of this type of business?

This is a great question. Let's first just look at our core thesis and break that down. At a simple level, we try to do a sum-of-the-parts analysis and say, "Okay, you've got these 6 different business units, but the one that we really care about is the entertainment business." That's where we see the growth, and that's where we see our edge.

We look at PlayStation with Crunchyroll and say, "Okay, collectively, in the next 4 or 5 years, you're going to be doing $10 billion or $11 billion in revenue." We're going to attach a higher multiple of over 20 times to each—20 times for that group—because they're great assets and they're growing fast.

Then we look at the rest of Sony—financial services, hardware, music, and Sony Pictures—and say, "Okay, let's just use consensus multiples, continue to grow this in a normal way, and don't get too cute." We have an edge view on key parts of it; for the rest of it, we just want to keep it simple.

At a high level, that's how we're looking at Sony. We've broken down the sum of the parts, and then we're focusing on multiple expansion and earnings on the things that we think are really going to change.

Holistically, let's take a step back. If I said, "Matt, what's a business that in 4 or 5 years will do $22 billion, $23 billion, or $24 billion in earnings, with margins of 20%? What's that worth today?" If you actually did that search in media and entertainment, there are fewer than 10 companies, and they're all $500 billion-plus.

If somebody achieves that, based on what I know today and how markets would value such an asset, we can get to our triple, or even more. Then you take a step back on the 2 assets that we care about, Crunchyroll and PlayStation: they reach, call it, 300 million-plus fans.

Then you say, "Look, let's incorporate Sony Music into this dynamic, too." Sony touches over 1 billion people. If you look at the top artists they represent on the publishing side, half the time their artists are at the top of the list. I think that's worth something.

My argument is that each of these assets has been at a slightly different stage of monetization. The PS5 cycle, for the first 4 years, has been a laggard in that sense: margins are low, and the titles weren't as good. Now we're about to enter the next 4 years, where you have a console-selling game coming out, management is focusing on live-service games, and you have this thing called Crunchyroll, which over the last 3 or 4 years has been consolidated. Now we're seeing strong quarter-on-quarter growth of paying subscribers.

In many ways, you have this big asset that's super mature and knows what it's doing, but when you look at the monetization part, you say, "Oh, you're actually early in some things here." In that way, it's almost different from most things that you're used to looking at. When you think about the scaled numbers I'm talking about, you kind of say to yourself, "This should be more profitable."

The profit itself will come both from revenue growth and from some optimization of margins, whether that's operating leverage or simply being more efficient.

If you were worried about one of those things more than the other, what would it be: the revenue growth or the ability to achieve the margins you think are possible?

I'm probably more concerned about the cost side, not the revenue side. That goes back to the fact that we make estimates and build operating models. We go beyond the financials, but it's hard to model out something that's so big.

Sony gives you good disclosure, but it's not a single asset. There's still more disclosure that would help us understand it. So when you ask where I spin my wheels, it's, "Okay, what is the cost structure here?" You have more than 100,000 employees globally.

It's not like they've taken the big haircuts you've seen in big tech lately. They've done some layoffs, but if you pushed me and said, "Could you do more?" probably, right? But on the revenue side, I don't lose sleep over that part of it.

That's very interesting, and it certainly makes sense. Where you sometimes expect to see operating leverage, it's tricky: you have to make assumptions, but monitoring and forecasting that is increasingly tough, especially within a business of this size.

When you look back over history, were there periods when Sony's margin profile was substantially higher? Was it in the mid-teens at any point? Was there a precedent to look at where they operated in that space? Sometimes companies get stuck in their ways or have a single way of operating, which can be tough to break out of. I'm not sure if there's any history here on that.

You can go back pretty far, Matt. Realistically, margins have always been in the low single digits, and we're now entering this next phase of, let's say, the mid-teens. The one period when margins expanded was obviously post-COVID, when they really expanded, but I think every company in gaming saw that big boost.

If you ask me, if you look back in time, margins have been in the 4% to 5% range in some years, then you get to 10%, and then you go back down. I'm really arguing that this next stage is the new norm. It should be closer to 20%.

If we get there, then the multiple will take care of itself, and people will look at this asset and say, "Wow, this is now running at the next level in terms of speed."

Thinking about the gaming business and PlayStation itself, we know the importance of Grand Theft Auto to console sales. What other titles do you think really stand out? Are there other pieces of that business that you think are important to monitor, whether they're crown jewels or simply important inflection-point titles that you have your eye on?

I would take a step back and say that, when you look at the console market, the part that's not getting enough attention is the emerging-market story: China and India.

When you look at China and say, "Wow, there are only 20 million console gamers out of 600 million," you can see that there's a lot of room to grow. Then you look at a market like India, where, for the first time, PlayStation is dominant. There's no one even close. It's, say, a $200 million market for them, which is a drop in the bucket, but for the first time it grew 50% year over year.

There are fewer than 1 million people on consoles in India, and I said to myself, "Wow." Gaming in India is about a $500 million market—$3 billion in total, mostly mobile gaming, probably. In my mind, what's missing, or what you need to think about that could potentially surprise you over 10 years, is that these markets that were not console markets could come up.

It goes back to the rise of the middle class in these countries. China has its own different dynamics, which we can talk about, but the India story is very clear in my mind. I do think Sony recognizes that because they've created a focused effort to invest in IP in India and support the local gaming market.

If you were to dive a layer deeper, what is the issue—or why isn't there a bigger console market there today? Is it the cost and pricing of the console, or the titles?

It's cost. In every emerging market, remember, you have to have a TV, and you're going to spend a couple hundred dollars to buy a device to play a game. That's too much of an ask. That's why the console market was pretty much in North America and Europe.

The user base hasn't grown as fast, but I think that can change if the emerging-market story picks up. The other thing to remember is that, within developed markets like the US, I think console gaming grows because the spending power of gamers increases materially.

To give you some thought process about how that looks, you have games that are just starting to incorporate live-service gaming in a way they didn't in the past. We're so early in terms of that model of in-game purchases being a staple.

Then you have a millennial gamer like myself, where we're entering our 40s and our spending power is only getting higher. Gaming is probably the best value for money in terms of time spent, and we're showing that love by going to watch shows like The Last of Us and then buying merchandise. It's an exciting time in terms of what it means to be a developed-market gamer.

The world of IP is fascinating, and it's interesting to see how the video game world has evolved around a lot of that IP, especially recently. When you think about the risks associated with Sony, what stands out the most to you, whether it's the thesis specifically or Sony more broadly?

There are a couple of ways you can look at the risk here. At a conglomerate level, if the capital intensity of the other hardware segments surprises us, then that's a risk. You have to remember the chip sector and the image-sensor business, which they're dominant in. It's concentrated among a few customers, and it's a big business—more than $10 billion.

You do have this other part of the business that's very hard for us to forecast, and that could surprise us at the conglomerate level. What if we're right about this but wrong about that?

If you think about our gaming-console thesis, the biggest risk—which I think is why many PlayStation advocates worry—is the idea of streaming video games directly to your TV, so you don't need a console. My answer to that risk and concern is simply that if you don't have the IP, it doesn't really matter, because the IP is the key part of the lock-in to these ecosystems.

The console is more than just something you play on. It's also where you store all your games. The one player that could really change the game, literally, is potentially Netflix. Netflix is installed on everyone's TV. They've tried to get into games, as has been well documented, but it's not there yet.

I think they're constantly evaluating that strategy because Netflix competes with sleep, and it competes with video game time.

How would you evaluate management at Sony? It's one of those things that's evolving in Japan, as has been well documented, but where would you put Sony's management in terms of decision-making and track record?

Since Mr. Yoshida took over as president and CEO in 2018, this is when you really started to see this focus and shift of Sony toward this strategy. If you looked at everything they put out from 2018 onward, you could see that it was becoming a more and more focused message because they see what they're really great at.

It's definitely content, and it's definitely IP. But if you talk to anyone on the street, they'll just think of hardware, TVs, and Walkman if you're thinking about the past. The management team has put a big effort into changing that.

I think they're doing a good job on that front. Where I think things get interesting is around the disclosure of Crunchyroll, where people see, "Oh, buried in this conglomerate is this potentially massive business at Netflix scale." That gets exciting when you think about finding these undiscovered gems. There's a gem of a business there.

That's fascinating. It's been an excellent pairing with your thesis. What would you say are the key lessons that stand out from studying Sony and researching Sony that you could potentially apply elsewhere as an investor?

The core takeaways from Sony are that there are multiple ways you can win in public markets. Our favorite has always been margin-expansion stories, because they take a little more work and effort than simply saying, "Here's this big TAM, here's revenue growth, and I buy."

A lot of growth and tech investors do that, but get down to the margin and get down to the bottom line. Can you see that expanding sustainably over a long period? If you get that right, that's the lesson I try to replicate in all of our other investments.

The other lesson, which we learned the hard way, is that if you can't get the management team to see the vision that you see and communicate it, that doesn't work very well. In the case of Sony, they've actually been very good about that.

The efforts they've made around saying, "We're going to focus on anime," and the communication they've done around the PlayStation ecosystem further indicate that to me. The lesson here, which hopefully we'll see over time, is improving corporate disclosure and putting more light on this gem of the business, then allowing public investors like ourselves to break apart the pieces and say, "Okay, here's what some of the parts look like."

If you just go look at it on your own, it's a pretty intimidating analysis when you have such a big business—more than $80 billion across 6 divisions. But I think the lesson learned here is to continue simplifying that. It's gotten better, but we're doing our part, too.

That might be the reason conglomerates are less and less popular. They're sometimes too complicated to sort through, but there might be some gems hidden within the overall business. Thank you very much, Sia, for sharing your knowledge, both on the overview of the video game market and thesis and on Sony itself.

It's absolutely my pleasure.

Thank you for your time.

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